Gas producers to TransCanada: Adapt Mainline or risk being left with 'stranded asset'

Canada’s top natural gas producers warned the National Energy Board on Monday that they won’t support an uncompetitive Mainline, opening the door to declaring the $6-billion natural gas pipeline a “stranded asset” unless owner TransCanada Corp. finds ways to adapt to market realities

CALGARY — Canada’s top natural gas producers warned the National Energy Board on Monday that they won’t support an uncompetitive Mainline, opening the door to declaring the $6-billion natural gas pipeline a “stranded asset” unless owner TransCanada Corp. finds ways to adapt to market realities.

“TransCanada needs to understand that it has to manage the asset for success,” said Réal Cusson, senior vice-president at Canadian Natural Resources Ltd. “It is not up to the NEB to provide Daddy’s money to bail out the kids for the weekend.”

Mr. Cusson was among oilpatch heavyweights who testified at an NEB hearing into the future of 14,101 kilometres of infrastructure that for the past half century has supplied Western Canadian natural gas to Eastern Canadian consumers.

Shipments on the Mainline, TransCanada’s backbone system, have collapsed to the point the pipeline is “a shadow of its former self,” as a result of the discovery of new shale gas resources nearby, David Collyer, president of the Canadian Association of Petroleum Producers, told the hearing.

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A new threat is looming from a one-billion-cubic-foot pipeline from the Ohio Utica shale to Ontario proposed by Spectra Energy Corp., DTE Energy and Enbridge Inc., TransCanada’s arch-rival, the hearing heard.

TransCanada has increased tolls to make up for the loss in volume, further discouraging its use at a time natural gas prices are depressed. Few producers now use the system, which is mostly supported by Eastern utilities during winter heating peaks.

TransCanada has proposed a fix involving raising tolls on its healthy Alberta network while reducing tolls on the Mainline, a solution it believes would encourage more cross-Canada natural gas shipments.

But Murray Edwards, chairman of Canadian Natural, said producers find the concept “offensive” because it would force them to assume costs and risk they never agreed to take on.

An increase in tolls in one pipeline to backstop another would be unprecedented and introduce regulatory uncertainty, depress natural gas activity and scare away investment, said Randy Eresman, president and CEO of Encana Corp. He likened such a move to Alberta’s royalty increases five years ago that caused drilling activity to dry up.

The producers are urging a reduction of tolls and costs. While TransCanada would have difficulty recovering costs over the short term, they argue TransCanada could make up losses over the longer term if its predictions that volumes will recover turn out to be accurate. Otherwise, they would prefer to leave things the way they are and let market forces prevail.

They complained that Trans­Canada isn’t responding to market realities because it sees itself as a regulated utility that is entitled to recover costs and is guaranteed a rate of return.

The two sides have been arguing over what to do with the Mainline for more than three years.

The dispute landed in front of the NEB, which has held 46 days of hearings so far, because the two sides are too far apart. The issue could return before the regulator if the Mainline’s volumes don’t recover, paving the way to declaring it a stranded asset, that is no longer economic to maintain.

“The best-case outcome is [TransCanada is] successful and they are recovering volume,” said Mr. Collyer.

If they are not, he said, “We’ll be back in front of the board debating a stranded investment case most likely.”

Gaétan Caron, NEB’s chairman, said the regulator has never faced such an outcome before. But the producers said it’s too soon to declare the Mainline stranded and argued TransCanada has options for it.